Markets Rise and Fall: Is Your Portfolio Ready For Both?

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It would be great if you could invest in things with high and reliable returns, going up and up consistently like clockwork and without worry. Unfortunately, that’s usually the sign of a Ponzi scheme. The chart above illustrates what you have to deal with in the real world. It shows how the S&P 500 (1949-2016) has had both significant losing streaks and big winning streaks, often one right after the other.

The source is Ric Edelman and The Most Important Chart on Investing You’ll Ever See and it comes via Barry Ritholtz and Edelman’s Favorite Investing Chart. Here’s a selected quote from the Edelman site:

This chart clearly shows that when stock prices are rising, they rise a lot and for a long time.

When prices fall, they fall a little and for a short period.


When you notice that stock prices are declining, don’t be upset. Instead become excited about what lies ahead.

Barry Ritholtz adds:

The usual caveats apply — post Great Depression took 25 years to return to breakeven, and Japan circa 1989 still needs the Nikkei Dow to almost double to get back to the high from almost 30 years ago. If you were retiring during those periods you were pretty much hosed. Still, the cyclicality of markets is very worth noting.

In my opinion, the takeaway is that your investment plan must be ready for both green and red streaks. For one, you need to be able to stay in the market and capture a good chunk of those long green streaks. Bailing out of a winning streak can cause you miss out a lot of money. At the same time, you need to survive those red streaks, which may not look that scary on the chart but are actually terrifying. (Remember that to simply get even from a 50% drop, you’d have to have a subsequent 100% rise.) This can be a tricky balancing act.

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  1. I like it. But the chart is somewhat misleading exactly for the reason that you state: “Remember that to simply get even from a 50% drop, you’d have to have a subsequent 100% rise.” At first glance, you think those red lines are tiny compared to the long green lines! Perhaps that should change the scale on the -y axis.

    • Very misleading graph.

      • even so… the long green rises have been more than 100% many times (current one being at 231%)
        so you ‘d have effectively gained twice of the original amount before the loss.

        • No. The baseline has changed. A simple numerical exercise can demonstrate. Original investment=10. 50% decline=5. 200% gain=15$. Thats only a 50% gain from original investment, nice, but a far cry from twice the original investment

          • but good enough to keep investing… no ? 🙂
            gist of the article is still good …. “stay put ” (as long as you can)

  2. The “usual caveats” from Ritholtz pretty much negate Edelman’s point. The Edelman chart is cherry-picked. It starts after WWII, when we were totally shell-shocked and the Great Depression was still resonating in everyone’s mind. Few people saw the stock market as anything but a path to misery. Those few people could profit immensely because so many others were fearful. Even in recent times, the Japan experience is very valuable. What “exceptionalism” separates us from the Japanese? I have never understood this.

    When people at large start to believe the inviolability of this Edelman Rule–“when prices rise, they rise a lot for a long time; when they fall, they fall a little for a short time”–is precisely when it will be violated. Take that to the bank.

    • The chart may be somewhat limited in scope (though it does cover 67 years), but the recorded history of the US stock market, as best as can be estimated, seems to hold up somewhat similarly.

      Time-to-recovery in the Great Depression is routinely overinflated due to not considering dividends and in particular deflation during that period. If those are taken into account, you get back to pre-crash peak in about 4 1/2 years. Granted, this doesn’t necessary help you much if you lost your job and had to sell stocks at a loss early on during that period, but that’s a different matter.

      Later recoveries (within the period included in the above graph) actually took longer in real terms.
      One source for all this:

      Agreed that it is probably wise to not put ALL your eggs in the US stock market basket, even so.
      And yeah, there’s going to be some pain for a lot of people (most everyone) coming up, at some point. But what else is new.

    • “When people at large start to believe the inviolability of this Edelman Rule–“when prices rise, they rise a lot for a long time; when they fall, they fall a little for a short time”–is precisely when it will be violated. Take that to the bank.”
      @Gerry: if you truly believe that this rule will be violated, what is your approach in terms of investing then? Please tell us all, so we can learn. Thanks!

      • @James, Why adjust for deflation during a depression while not adjusting for subsequent inflation during a recovery?

        @Eric, I’m not sure if you meant the question derisively, but I’ll give my best answer. It is rational that stock markets reflect a premium for risk over “less risky” investments. It is also true that market behavior is not necessarily rational at all times in all places. Thus is it is entirely reasonable that stock prices *can* fall a lot for a long time.

        As we become fonder of hard-and-fast rules, as we become indexers leaving the problem of actual valuation to fewer and fewer participants, we risk losing the tether to what constitutes value.

        I have a background in arbitrage and am reasonably comfortable, but only about 10-15% in stocks. I am about 50% in a portfolio of income property, where I can articulate the reasons why I believe my money is well invested. The remainder of my assets are in fixed income investments, about half of which are inflation adjusted.

        • @Gerry, sounds to me that your comment is based on risk adversity and a subjective perception of investment control. It has nothing to do with whether a rule can be violated or not. Any rules for any investment could potentially be violated whether it is for stock or for other types of investments like real estate for example.

          • *aversity
            The first edition of Graham & Dodd’s “Security Analysis” (1935?) contained an analysis of White Motor Co., a company that was trading below its cash per share. By all indicia, White Motor was a screaming buy. It was priced where it was because market participants in general were terrified. That is not the only time one buys a stock. But I have just articulated a reason to have bought White Motor, other than “stocks tend to go up.” We can disagree about whether that reason is subjective or not. Best of luck to you.

          • Re *aversity below: “Risk aversion,” not “risk adversity.” The correct word is averse, not adverse. But the noun is aversion, not aversity. My bad.

        • @Gerry, I agree, all investment performance should be considered with respect to inflation, to the extent possible. Otherwise it begins to lose meaning over time when you analyze the past or project the future.

          In this case, since the graph presumably shows nominal returns, that indeed means that most of the time real returns are a little lower than the amount shown. The cycles are short enough that it probably doesn’t make a dramatic %-wise difference in most instances. Though as I noted there was at least one time during the 70’s to 80’s when I believe inflation meant real returns were WORSE than investing at the peak of the Great Depression.

          You’re certainly correct though, converting to real returns can cut both ways. Perhaps more significantly though, a zoomed out plot of even nominal returns that includes the Great Depression doesn’t look all that scary. The scary times have so far always been relatively short term.

          That said, I think it’s great to have variety in investment types (such as your properties) and for people who don’t like the idea of the stock market’s volatility to emphasize fixed income investments. I also appreciate the value of investing based on rigorous individual stock/company analysis — I’m just not good enough at it to stake a substantial portion of my net worth on it personally!

          • @James, I think we can agree that–no matter how it is sliced–an event such as the Great Depression does not squarely fit the Edelman Rule: it was in no sense “prices falling a little for a short time.” I’d enjoy discussing Depression-era returns at greater length with you than is possible here; it’s a topic that interests me.

            I like real estate investing because it is conducive to the sort of rigorous quantitative analysis that Graham and Dodd introduced into the stock markets. In today’s stock markets, though, classical security analysis has been supplanted by this more nebulous “let’s just index and capture the risk premium” thinking, which–because the very notion that a risk premium exists is predicated on the assumption that investors are rational and analytic–is a form of circular reasoning.

            Ultimately, I just don’t believe in hard-and-fast “Rules.” Investors must at all times be vigilant, analytic, and willing to challenge conventional assumptions. In the vernacular: You snooze, you lose.

  3. When will come a time when the backstop to the market will be taken away? I don’t see that happening without those providing the backstop being blamed for any of the misery that would ensue following a significant crash. If easy money has fueled a consistently rising stock market without protest for so long, what would prompt a change now?

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